Financial Management Competence and SME Performance: Insights from Mbarara City, Uganda

Abstract

Small and Medium-Sized Enterprises (SMEs) are essential to Uganda’s economic growth, yet many face early closures due to poor financial management. This study explored the influence of financial management competence on the financial performance of selected SMEs in Mbarara City, Uganda, anchored in the Resource-Based View (RBV) Theory. A quantitative approach using correlational and descriptive research designs was employed, involving 172 SME owners from a target population of 300, with purposive, stratified, proportionate, and simple random sampling techniques. Data were collected via self-administered and researcher-administered questionnaires and analyzed using SPSS version 28. The research instruments were pre-tested for validity and reliability, and null hypotheses were evaluated at a 0.05 significance level. The correlation between financial management competence and SME performance was weak but positive (r = 0.377) and statistically significant (p < 0.01). This correlation suggests that while there is a positive relationship between financial management competence and SME performance, this relationship is modest. In other words, improvements in financial management competence are associated with slight improvements in performance, but other factors may also play a role. The weak positive correlation implies that while financial management competence is important, other factors may also contribute to SME financial performance, warranting further research into additional determinants. Regression analysis indicated that financial management competence significantly contributed to improved SME performance (t = 5.083, p = 0.000, p < 0.05). Based on these findings, it is recommended that SME owners invest in strengthening their financial management skills to enhance business performance and reduce early closures. The originality of this study lies in its focus on Mbarara City by highlighting contextual financial challenges and opportunities unique to this city, providing valuable insights into the role of financial management in SMEs, particularly in Uganda’s developing economy.